If you want to generate passive income from your investment portfolio, Agree Realty (ADC 1.25%) is one stock to consider. The real estate investment trust (REIT) offers an attractive dividend yield of 5.1%. Not only that, but the company pays its dividend monthly, making it an appealing option for investors looking to generate consistent profits from their portfolios.
While its long-term performance has been stellar, rising interest rates over the past couple of years have weighed on the company and the commercial real estate industry in general. If you're a current shareholder or are looking to buy shares, you'll want to consider the following first.
Agree Realty's reliable tenants fuel its monthly dividend
Agree Realty acquires and manages stand-alone retail properties leased to high-quality tenants, which helps make its cash flows more resilient to economic downturns. Most of its rent comes from grocery stores, home improvement, tire and automotive service centers, dollar stores, and convenience stores.
Image source: Getty Images.
The REIT has a diversified tenant base, with no tenant making up more than 6.1% of its annualized base rent (ABR). Its largest tenants include Walmart, Tractor Supply, Dollar General, Best Buy, and CVS.
Its high-quality customer base (nearly 70% of its tenants have investment-grade ratings) can weather downturns and provide a reliable income stream for the REIT. At the end of last year, 99.8% of its properties were leased with a weighted average remaining lease term of 8.4 years.
The REIT's stable customer base is why it has grown its funds from operations (FFO) per share by 102.5%, or 7.3% compounded annually, in the past decade. Over that same time, its dividends per share have grown by 75% or a steady 5.7% annually.
ADC FFO Per Share (TTM) data by YCharts
Rising interest rates have weighed on the real estate industry
Real estate operators have had a tough go of it over the past couple of years. The main culprit is rising interest rates, which have increased steadily as inflationary pressures in the U.S. economy emerged a few years back. Interest rates went from historically low to a level people haven't seen in a decade and a half. In response, the 10-year Treasury yield went from 0.52% during the pandemic's height to nearly 4.47% today.
Rising interest rates can hurt real estate companies for several reasons. That's because borrowing costs on new or floating-rate debt go up, making it more expensive to fund acquisitions. This affects short-term earnings, as the rising costs squeeze profits and require a higher return on investment to make acquisitions worthwhile.
Rising interest rates also make other, less risky income investments, like bonds or certificates of deposit, more attractive and put further pressure on the stock.
Agree Realty continues to grow despite a challenging backdrop
Since peaking at around $73 per share in June 2022, Agree Realty stock has fallen 20%. Its overall performance hasn't been much to celebrate, either. Since the start of 2022, the REIT's total return (including the effect of reinvesting dividends) was -7.6%, below the S&P 500's 13.6% return over the same period.
Despite this, the company continues to grow at a nice rate and build on its solid foundation. Last year, Agree Realty acquired 282 retail properties for $1.2 billion, with an average weighted lease term remaining of 11.3 years. In the first quarter, the REIT acquired 31 more properties for $128 million.
Agree Realty has a strong balance sheet, and its use of leverage is low compared to its peers. It also has a reasonable payout ratio, at 72% of its Q1 adjusted FFO, which should give investors confidence that it can continue to deliver on its monthly dividend payment.
Should investors buy, sell, or hold Agree Realty?
Agree Realty has weathered a challenging period for commercial real estate as interest rates rose at their fastest pace in decades. As a result, the stock is reasonably priced at a price-to-FFO of 14.3 and is on solid financial footing, with no debt maturing until 2028.
It's been a tough stretch for real estate investors. If you're holding Agree Realty, I think it's a stock you'll want to continue to hold long-term. And with interest rates stabilizing and rate cuts likely later this year or early next year, now looks like a good time for prospective investors to get in on the action too.
